Advisor Flipbooks

2024 SEI ® Data as of 12/31/2023 unless otherwise indicated. 12 Exhibit 16 shows that general government expenditures also have become a larger part of the economy for many countries. The COVID-related spike in spending has dissipated, but France, the U.K., and the U.S. appear to be settling at higher spending levels relative to GDP than has generally been recorded in the past. It is important to note that the International Monetary Fund projects a steady rise in the spending-to-GDP ratio for the U.S. over the next few years to levels that have previously been matched or exceeded in recent decades only during recessions. This is a significant development, since the U.S. economy is currently operating at full employment, a time when revenues are strong and anti-cyclical spending to support the economy is low. In a recessionary economy, the deficit in the U.S. could approach 10% of GDP. Exhibit 16: Big Government gets bigger Source: International Monetary Fund, National Sources (2022), SEI. Note: 2003 through 2028 are IMF forecasts. Geopolitics: Things are getting messy We expected geopolitical considerations in 2023 to be nearly as fraught as they were in 2022. We anticipated that the war in Ukraine would drag on, which it did, but financial markets ended up being much more complacent about subsequent developments than we would have thought. More oil flowed out of Russia and Iran, and Europe managed to adjust to the elimination of Russian natural gas exports into the region by ramping up liquefied natural gas (LNG) imports from the U.S., Qatar and Nigeria. Massive conservation efforts, increased reliance on coal and a bit of luck in the form of benign weather conditions, also provided significant assistance in overcoming the energy challenge. A new source of possible volatility in the oil markets is the war between Israel and Hamas. Although the war has thus far remained fairly localized, a broader regional conflict cannot be ruled out. Hezbollah, an Iran-backed, Shiite Muslim political party and militant group based in Lebanon, remains a threat on the Israeli-Lebanese border, while the Houthis in Yemen continue to attack shipping in the Red Sea. Maersk and Hapag-Lloyd, two major container-ship operators, temporarily suspended operations in the Red Sea and the Gulf of Aden in mid-December. BP, a large U.K.-based integrated oil company, also has paused transiting through the Suez Canal. Other carriers are following suit, jeopardizing supply chains yet again. There is pressure on the U.S. and other countries to protect this important shipping lane, but so far there has been a reluctance to deal forcefully with the Houthi militants. The same can be said with regard to Hezbollah; there have been more than 100 attacks on U.S. forces and interests, both at sea and on the ground. Thus far, these attacks have been mostly pinpricks. But the danger of a serious attack that injures or kills American military personnel would require retaliation—at the risk of involving Iran in a more direct fashion. Five thousand miles to the east, tensions between the U.S. and China continue at a low simmer, pretty much as we expected at the beginning last year. Taiwan remains a flash point, however, and the Biden administration's efforts to deprive China access to the most advanced semiconductors and chip-making equipment underscores the troubled relationship that now exists between the two superpowers. The administration's big push to incentivize the building of semiconductor manufacturing capacity in the U.S. is a clear sign that the U.S. political establishment is preparing for the worst—a takeover of Taiwan and a disruption of the supply of essential chips—while hoping that the worst never happens. China's President Xi and President Biden lowered the tension somewhat between the two countries during their meeting in San Francisco in November. Military officials are again talking to each other, and John Kerry, U.S. Special Presidential Envoy for Climate, worked closely with his Chinese counterpart to push for a broad consensus at the COP28 climate change conference in December. In our view, this flurry of diplomatic activity toward the end of 2023 might reflect President Xi's growing concern over his country's economic performance. 25 30 35 40 45 50 55 60 65 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 Percent of nominal GDP General government expenditures as percent of GDP France Italy Germany U.K. Canada Japan U.S.

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